Quarterly Investment Guide

Hungry for revenue, states hanker for unclaimed assets

Jeff Brown, special to CNBC.com

You work hard and save for the future. Everything's on track — until, for some strange reason, you drop the ball and leave your money behind. Poof! It's gone.

Steven Puetzer | Getty Images

It may seem hard to believe, but assets in 401(k)s, IRAs and taxable investments — not to mention bank savings and other financial assets — are abandoned all the time in what are legally termed dormant accounts. To reunite owners with their forgotten property, most states instituted clear and reasonable guidelines to smooth the process.

Yet in recent years, unclaimed property has grown into a major revenue stream for many states. According to the National Association of Unclaimed Property Administrators (NAUPA), states hold about $42 billion in unclaimed property, up from $32.8 billion in 2010, and studies show the vast majority is in cash, mostly from accounts worth less than $100, as well as lost 401(k)s, IRAs, taxable investment accounts and other assets, such as life insurance benefits and even uncashed traveler's checks.

California alone says it has about $8 billion in unclaimed assets. Hungry for revenue, California and other states are devising ways to be more aggressive in taking over these funds for government use.

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Unfortunately, their strategies appeared to get a green light at the end of February when the U.S. Supreme Court refused to hear a California case challenging California's Unclaimed Property Law, which allows the state to seize unclaimed property after three years, even if only a feeble attempt was made by the state to contact the owners.

The importance of the issue was underscored by a concurrence written by Justice Samuel Alito. While acknowledging that the case in question was a "poor vehicle" for dealing with the issue, Alito said: "This trend — combining shortened escheat periods with minimal notification procedures — raises important due process concerns." He noted that technology makes it easier and easier to find property owners, and he expressed hope the court would take up the issue in a future case.

Tracking down your missing money

"The states, in a grab for money, are changing the rules of the game," says Tami Salmon, assistant general counsel for the Investment Company Institute, the trade group for the mutual fund industry.

"We're seeing a trend among states to shorten the dormancy period before deeming accounts to be abandoned," Salmon says, describing the escheat process for taking over funds.

Fortunately, the IRS and Department of Labor and other websites, like MissingMoney.com, make it fairly easy for account holders and their heirs to track down missing property, such as unclaimed wages, pension benefits, tax refunds, and unclaimed securities and judgments from SEC actions. The claims can even be made without details, like account numbers. Many financial advisors are urging clients to take the initiative.

"States are increasingly reverting to inactivity criteria to claim unclaimed funds, so it is important that consumers understand the importance of maintaining interaction with the companies that hold their financial assets, says Dana Terry, president of the Unclaimed Property Professionals Organization. "We suggest contacting each institution at least once per year to let them know you are still aware of your assets."

6 steps for finding and claiming lost property

  1. List all the states where you might have had accounts, along with your addresses in each state.
  2. Go to the NAUPA website and click on your first state.
  3. Fill your name into the form and follow the directions.
  4. Repeat with any variations of your name, such as a maiden name or shortened version of your first name.
  5. Repeat with each state on your list.
  6. Repeat with Delaware, Massachusetts and Maryland — states where many financial services firms are registered — as some dormant accounts are listed at the firm's address instead of the original account holder's.

Many states, Salmon says, argue they don't have the resources to track down owners of abandoned property. But critics point out that states are pretty efficient at finding people when it's in their financial interest to do so, as with delinquent taxpayers.

When an account is deemed abandoned, it is converted to cash and taken over by the state. Account holders and heirs who can prove their claims can recover the cash no matter how many years have past, but they miss out on any interest earnings or investment gains the account might have earned in the meantime. That can be particularly damaging to people who lose investment accounts, Salmon says.

In recent years, many states have shortened the period for determining property to be abandoned, typically to three years from five or seven.

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Even more worrisome, says Salmon, is a trend toward a laxer standard for judging an account to be inactive. In the past, any kind of activity, including automatic deposits or withdrawals, meant an account remained active, even if there were no direct communication between the account holder and institution. An account was deemed inactive only after a long period of no activity at all, and after the financial institution had failed in attempts to reach the owner. Mail returned as undeliverable was often required to meet that standard.

But California and other states have dropped those rules. Automatic account activity no longer counts, and it is essentially up to the account holder to keep in contact with the institution. The institution no longer has to make an aggressive effort to find the account holder.

States are increasingly reverting to inactivity criteria to claim unclaimed funds, so it is important that consumers understand the importance of maintaining interaction with the companies that hold their financial assets.
Dana Terry
president of the Unclaimed Property Professionals Organization

Vanguard Group, the mutual fund company, says it strives to abide by the laws of each state but is troubled by requirements that account holders "actively communicate" with the financial institution to keep an account alive.

"This redefinition raises concerns in the investment community since many investment accounts are, by their very nature, long-term investments, and an owner might not expect that he or she has to actively reach out to make unnecessary transactions to claim the assets," a Vanguard spokesman explained.

Federal law, she noted, requires that IRA and 401(k) investors start taking minimum required distributions after turning 70 1/2, but allow the entire sum to be taken from only one account, even if the investor has several. Some states, however, will nonetheless deem the untouched accounts to be abandoned if there has been no activity, despite activity in the investor's other accounts.

Some states, Salmon says, use private firms to determine that property has been abandoned, paying them a percentage of whatever the state is able to take over. That creates an incentive to deem property abandoned rather than to find the owner, she argues.

The ICI would like to see a return to a longer dormancy period, such as seven years, and tougher standards for determining an account holder is unreachable. "If we could have our druthers, it would be the returned-mail standard," Salmon says.

But in late February, state officials represented by NAUPA rejected a proposal to revise the rules to require aggressive searches for unclaimed property owners.

So for now it's up to account holders and their loved ones to take the initiative. Most states have websites for tracking down accounts, often requiring only a name for starters. Search the state's name, along with the term "unclaimed property." NAUPA operates a nationwide site, and some other resources can be found here).

While there are companies that track down unclaimed property for clients, Amanda Thomas, a certified financial planner at Mission Wealth in Santa Barbara, California, says, "Wll they are doing is searching your name on each state's unclaimed asset list and charging you a fee for something you can do on your own." Recently, one of her clients used a New York State site to recover $20,000 in cash lost for 20 years, she said.

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Of course, the best way to avoid losing assets to the state is to keep track of what you have and to make sure, in case something happens to you, that others know, too.

"You should always advise a family member or close friends where you keep your personal information, such as life insurance policies and banking information," says Tanya Hobson-Williams, an elder-law attorney in Jamaica Estates, New York.

"Also, if you maintain a safe deposit box," she said, "a spare key should be provided to a family member or close friend in the event access is needed."

By Jeff Brown, special to CNBC.com